Apr 15, 2020
The coronavirus has been likened to a war on our health, our economy and our community’s livelihoods. While the government and private sector are joining hands to fight the virus and defend the economy, we believe individuals need to ensure they have a plan in place to safeguard their finances and to grow their wealth over time. Know why you have cash in the bank. Is it just lazy money that you’ll still get round to invest and which helps you finance impulsive buys, or is it your financial moat? Retrenchment, a business that goes belly-up or unforeseen expenses can plunge you into a financial black hole if you don’t have a war chest to keep you safe financially. As a rule of thumb, ensure you’ve saved at least six months’ worth of income. Don’t dip into your emergency fund, and remember to top it up regularly as your income increases. Individuals and businesses have typically used a money market fund as a vehicle to build their war chest.
Investing is much more than picking a fund because you like the return that the fund aims to achieve or has achieved previously. The recent dramatic falls in financial markets highlight how crucial it is to choose funds that match your risk profile and personal circumstances. With the help of a financial advisor, select suitable funds that meet your short-, medium- and long-term needs. As mentioned in Tip 1, use an emergency fund to meet unexpected expenses or to manage a loss of income. This will help you stay the course with your long-term investments so that your portfolio has time to recover, and you avoid locking in losses.
The COVID-19 epidemic has unleashed widespread panic and fear among investors, with many bailing out of the stock market and moving to cash. It’s human nature to want to act when our world gets shaken up, even more so when the future seems very uncertain. That is why it’s important to have an investment strategy that covers your investment bases (Tip 2), so that you will avoid knee-jerk reactions when markets tank. Switching based on wild swings in performance can be value destroying. It may be tempting to try and time the market, but many investors have burnt their fingers attempting to call the bottom during previous down markets. Removing emotion from investment decisions (e.g. fear or greed) is especially difficult when dealing with your own money, so it’s best to seek professional advice from a financial advisor.
South Africa is small in the context of the global investment universe, representing less than 1% of global equity, property and bond markets. Today, more than 50% of the profits of businesses listed on the JSE are generated from outside South Africa. In the volatile world in which we find ourselves, you need to have a global perspective to navigate the choppy waters of investment markets. When you diversify internationally, you get access to a much wider range of investment opportunities to grow your money across countries, industries, companies and currencies. Investing offshore, can also help minimise the impact of currency depreciation or political and market events on your wealth.
You can invest up to 30% in global assets through suitable domestic unit trusts. You can also gain offshore exposure with international feeder funds. Alternatively, you can convert your rands and invest directly in foreign-domiciled funds. It’s important not to view your international assets separately from your domestic assets. You need to consider your overall portfolio holistically to make sure it is in line with your risk profile and personal circumstances. Long-term savers have typically invested in a combination of asset classes that can provide growth over the long term and help preserve capital in down markets. It’s best to seek professional advice from a financial advisor.
When markets experience sharp falls, you may feel the urge to check your retirement fund portfolio values constantly. Avoid taking your investments’ financial temperature every day. Investors should guard against panicking and switching into a retirement portfolio that is too conservative for their long-term savings needs. To enjoy inflation-beating returns over the long term, requires a willingness on the part of investors to take on market risk, by investing in growth assets such as equities. Markets do not go up in a straight line, so investors need to stomach short-term volatility to achieve their long-term financial goals.
Do not be tempted to stop your retirement annuity contributions or lower your contributions to your company’s retirement fund because markets are turbulent. While investors may find volatility and lower asset prices very uncomfortable, investment managers employ a range of strategies to manage risks and identify buying opportunities throughout market cycles (up and down markets). It’s important to stay the course with your investments. Arriving at a sufficient retirement pot is a journey that takes a full working lifetime. A financial advisor can help guide you during volatile market periods.
Building a sustainable retirement pot, saving for a specific goal and safeguarding your capital when unexpected events happen, are just some of the key questions you have to grapple with during your lifetime. The decisions you make today around money, can have a far-reaching impact on the quality of your life – now and for many years to come.
A financial advisor can help you: draw up a monthly budget, set financial goals, determine how much investment risk you can take, identify which funds and products may be suitable for your needs, save tax and do estate planning. Your financial road map may need tweaking, but an advisor will typically review your plan annually and make adjustments where necessary. As mentioned in Tip 3 and Tip 5, having a professional by your side, can also help you avoid emotional, knee-jerk investment decisions in response to sharp market movements or unexpected life events.
We believe in the importance of independent and qualified financial advice. A professional financial advisor can help you set realistic financial goals, plan towards those and partner with you as you adapt to changing needs and circumstances.